Opinion – Grain by Grain: Discover Howard Marks’ three criteria for deciding when to sell your shares

Yesterday I wrote about the main points that Howard Marks understands as less important in investments, but which investors end up adopting. Marks is Co-Chairman of Oaktree, a manager that manages BRL 880 billion in client funds. He argues that investors end up holding assets for too little time. However, despite encouraging a long-term view in investments, he suggests that you should exit an investment by evaluating three criteria.

In his latest article, Marks explains four attitudes that stock investors should pursue:
• deeply study companies and securities, assessing their earnings growth potential;
• buy assets at attractive prices in relation to their potential;
• keep them as long as the company’s profit prospects and price attractiveness remain intact; and
• make changes only when these things cannot be reconfirmed or when something better comes along over time.

The manager claims that he always invests with a long-term horizon and looks for companies that he believes will become even more valuable over time.

However, this maintenance in the portfolio is conditioned to three criteria: price attractiveness, earnings growth potential and absence of better alternatives.

While Marks doesn’t much consider the effect of short-term macroeconomic changes, microeconomic factors can change the outlook on a company.

For example, changes in the company’s competitive environment, such as the emergence of new entrants, regulatory changes and technological innovations can change the perspective of earnings growth and share value.

Even with a long-term view, at all times, you should reassess keeping the assets in your portfolio, taking into account their price attractiveness and potential for earnings growth.

Therefore, be careful when investing in stocks following only social media tips and without making a deep assessment of the asset and its prospects.

Howard also suggests changing assets when other exposures are more attractive than the current one. Therefore, the same assessment above must be continually revisited and compared with investment alternatives.

Thus, having a long-term vision does not mean investing in an asset and forgetting about it, but continually looking at its long-term potential and changing it when it is not attractive or something better comes along.

At this link, you can find the entire collection of articles by Howard Marks.

Michael Viriato is an investment advisor and founding partner of Investor House

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